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Stels [109]
3 years ago
14

McCoy’s Fish House purchases a tract of land and an existing building for $910,000. The company plans to remove the old building

and construct a new restaurant on the site. In addition to the purchase price, McCoy pays closing costs, including title insurance of $2,400. The company also pays $12,900 in property taxes, which includes $8,300 of back taxes (unpaid taxes from previous years) paid by McCoy on behalf of the seller and $4,600 due for the current fiscal year after the purchase date. Shortly after closing, the company pays a contractor $45,900 to tear down the old building and remove it from the site. McCoy is able to sell salvaged materials from the old building for $4,000 and pays an additional $10,300 to level the land.
Required:Determine the amount McCoy’s Fish House should record as the cost of the land.
Business
1 answer:
Nina [5.8K]3 years ago
3 0

Answer: $972,900

Explanation:

The cost of land consists of the actual purchase price, and all other expenses that are necessary to make the asset ready for its intended use. In terms of land, all these expenditures can include title fees, unpaid taxes from previous years only (i.e. not current taxes), and other expenses need to physically prepare the land for use. The current taxes figure of $4,600 is not included here, as it is only owed during the current year, therefore normal accounting rules for taxes will apply. This figure will thus be treated as a liability until it is paid. The back taxes were aqcuired when the asset was aqcuired, and thus form part of the cost.

Old buildings that were on the land, may need to be teared down so that land can be utilised. The costs used to demolish the building also forms part of the purchase price. On top of that, to fully prepare the land for use the land may need to be landscaped and leveled. All these costs contribute towards getting the land ready for use, and are thus included in the cost. Sales made on any item related to the land, during the process when the land was still being processed for its intended use, will reduce the cost of the asset, and deduct this figure. This figure will fall under sales, which is an income to the business. The full calculation of the cost is as follows:

Purchase price: $910,000

Title insurance: + $2,400

Unpaid property taxes: + $8,300

Cost of removing building: + $45,900

Sale of salvaged materials: - $4,000

Level the land: + $10,300

Cost of land: = $972,900

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